On the Range of the Risk-Free Interest Rate in Incomplete Markets
In a model of a two-period exchange economy under uncertainty, we find both upper and lower bounds for the risk free interest rate when the agents’ utility function exhibit constant absolute risk aversion. These bounds are independent of the degree of market incompleteness, and so these results show to what extent market incompleteness can explain the risk-free rate puzzle in this class of general equilibrium models with heterogeneous agents. A general method of finding bounds without the assumption of constant absolute risk aversion is also presented.
|Date of creation:||Dec 2000|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.cam.ac.uk/index.htm|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Weil, Philippe, 1992.
"Equilibrium asset prices with undiversifiable labor income risk,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 16(3-4), pages 769-790.
- Philippe Weil, 1992. "Equilibrium Asset Prices With Undiversifiable Labor Income Risk," NBER Working Papers 3975, National Bureau of Economic Research, Inc.
- Weil, P., 1991. "Equilibrium Asset Prices with Undiversifiable Labor Income Risk," Harvard Institute of Economic Research Working Papers 1564, Harvard - Institute of Economic Research.
- Tyge Nielsen, Lars, 1993. "The expected utility of portfolios of assets," Journal of Mathematical Economics, Elsevier, vol. 22(5), pages 439-461.
- Narayana R. Kocherlakota, 1995.
"The equity premium: it's still a puzzle,"
Discussion Paper / Institute for Empirical Macroeconomics
102, Federal Reserve Bank of Minneapolis.
- Gabrielle Demange & Guy Laroque, 1993.
"Private Information and the Design of Securities,"
CEPR Financial Markets Paper
0036, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
- Miles S. Kimball, 1989.
"Precautionary Saving in the Small and in the Large,"
NBER Working Papers
2848, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
- Laurent Calvet & Jean-Michel Grandmont & Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique.
- David K. Levine & William R. Zame, 2002.
"Does Market Incompleteness Matter?,"
Econometric Society, vol. 70(5), pages 1805-1839, September.
- Elul, Ronel, 1997. "Financial innovation, precautionary saving and the risk-free rate," Journal of Mathematical Economics, Elsevier, vol. 27(1), pages 113-131, February.
- David K Levine & William R Zame, 2000. "Risk Sharing and Market Incompleteness," Levine's Working Paper Archive 2080, David K. Levine.
- Rahi Rohit, 1995. "Optimal Incomplete Markets with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 65(1), pages 171-197, February.
- Ohashi Kazuhiko, 1995. "Endogenous Determination of the Degree of Market-Incompleteness in Futures Innovation," Journal of Economic Theory, Elsevier, vol. 65(1), pages 198-217, February.
When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0030. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb)
If references are entirely missing, you can add them using this form.